Who pays for unemployment benefits?

Private employers pay a tax to finance the unemployment benefits paid to their former employees. For most employers, this tax rate goes up or down depending upon how much their former workers collect. Some organizations (usually non-profit or government agencies) reimburse the state, dollar for dollar, for any unemployment benefits paid by the state, in lieu of paying the tax.

In order to control your organization's unemployment costs, it is ordinarily not essential for you to know whether your employer repays the state for unemployment benefits through a quarterly payroll tax or through reimbursement to the state for benefits paid. However, reimbursing employers should be aware that they may not have the right to protest benefit charges, even in those situations where they were not the last employer at the time the claim was filed.

It is important to understand that it is in the employer's best interests to limit the payment of benefits to former employees. Failure to limit unnecessary unemployment benefit payments will immediately impact the charges made to a reimbursing employer. Taxpaying employers will eventually pay a higher rate based upon unnecessary charges, but the increase may not come during the next tax year. Eventually, cumulative unnecessary unemployment claim charges will push the organization's tax rate up into the next higher tax bracket.

Q: If reimbursable financing has the disadvantage of not being able to protest all claim charges, why shouldn't governmental or non profit employers elect to pay the tax instead?

A: Reimbursing employers must reimburse the state dollar-for-dollar for the benefits paid to their former workers. Tax-paying employers, on the other hand, may pay a "social" penalty which exceeds the state's actual costs. In other words, the employers at higher tax rates subsidize those at lower tax rates.

Disclaimer: The information contained in the examples given on this page is general in nature and is not intended as legal advice. There are no guarantees that a particular state unemployment adjudicator will rule as others have in the cited examples. Individuals seeking legal advice concerning the handling of similar matters should consult with their attorney, rather than relying upon the information given.

The purpose of this document is to educate clients and potential clients about unemployment compensation. While some effort has been made to address the many differences in laws and procedures in the 53 different jurisdictions (each of the fifty states plus Puerto Rico, Washington D.C. and the Virgin Islands), the primary purpose of this presentation is to review some basic principles shared by many jurisdictions.